Why Price Action Beats Indicators
If you have ever taken the time to look at your trading station in detail, you will have noticed that there are dozens of indicators that you can apply to any chart. Many traders – including a lot of unsuccessful ones – just couldn’t live without these indicators. One of the main reasons for this is that they are comforting, acting like a security blanket that seems to make forex trading almost automatic. Just follow the indicator signals and make your trades.
However, if forex trading was this robotic, everybody would be doing exactly the same thing and making lots of money. Since forex trading is essentially a zero-sum game, this is obviously not the case. It is both a science and an art, and your intellect is ultimately your true trading edge.
The problem is that indicators hide what is going on in the market right now, since they always lag the market. By using indicators, you are denying yourself the opportunity to make well-informed decisions based on what is actually happening at the moment. The result is that traders too often enter a position using indicators, only to find out that the market starts to run almost immediately in the opposite direction.
A better strategy is to use price action – looking for signals in the raw chart to decide when there is a good setup that is worth entering. This allows you to make intelligent decisions as the market unfolds, rather than relying on indicator signals from the past. Keep in mind that indicators are built on raw chart data anyway, so all of the information they contain is also in the raw chart if you know where to look for it.
Using price action on raw charts also simplifies trading. One of the real drawbacks of indicators is that they overload charts, making decisions more difficult and obscuring the fundamental price movements in the market. If you are paying attention to half a dozen different indicators at the same time, then your mind will become overloaded and you will miss what is actually important. Worse still, you will become confused and frustrated – which will ultimately lead to bad trading decisions. We all have a limited ability to cope with complexity, and when we are on mental overload we become emotional. As a result, we lose discipline and start to make trades that aren’t aligned with our overall trading plan.
Finally, indicators can become an addiction. Traders are always looking to find the next great combination of indicators that they think gives them that extra edge. They tune their indicators to greater and greater levels of complexity, see a few positive results and think that they have the winning combination – whereas what they’re getting is actually random. Once they start to lose, they then jump to another indicator strategy and start the whole cycle over again. The result is a complete loss of focus and consistency – a recipe for disaster.